Water bills will fall by up to £25 a year in real terms from 2020, under plans by the industry regulator, as it plans to force firms to pass on savings from reduced financing costs to customers.

Regulator Ofwat will carry out its next price review in 2019, and is proposing to set the so-called 'cost of capital' that has a direct bearing on bills at a record low of 2.4%.

It will also set out service performance and targets for the 2020-25 period.

The body pledged customers in England and Wales could "look forward to lower bills, improved services, reduced leakage and more help for the most vulnerable".

A real terms cut in bills will not necessarily mean customers paying less - just that any increases they see will be lower than the rate of RPI inflation, which currently stands at 3.9%.

Chief executive Cathryn Ross said: "The next decade will see profound changes in customers' expectations and we are pushing the water sector to be at the very forefront of that."

She added: "We've said many times already that this will be a tough price review for companies.

"We will cut the financing costs they can recover from customers and, with this lower guaranteed return, they will need to more efficient and innovative than ever before.

"I've no doubt that the sector can step up and meet the challenges we've laid before them today."

Michael Roberts, chief executive of Water UK, said: "This is a tough challenge from Ofwat - and it'll be tougher for some companies than others - but the industry has a strong track record in providing customers with a world class product and service.

"We've cut bills, increased help for the less well-off, and reduced leakage by a third, and we are committed to achieving even more for customers in the future."

In January 2016, MPs blamed the regulator for millions of households paying too much for their water supply.

The Public Accounts Committee said OFWAT had consistently overestimated companies' financing and tax costs when setting price limits.

It said consumers would be appalled to learn that their bills - which averaged £396 in 2015 - could have been smaller if the regulator had adopted a different approach to setting the limits to the amount companies could charge customers.

The committee said the overestimates meant the firms made windfall gains of at least £1.2bn between 2010 and 2015 from bills being higher than necessary.